Posted by Matt Purdue
Bernie Madoff made off with millions of dollars in advisor fees generated by his Mother of All Ponzi Schemes. But now he’s been nailed, jailed and will spend the rest of his life enjoying three hots and a cot. I feel for his victims, I really do. But some of them are hardly blameless.
In California, real estate developer Robert Schapiro, himself a victim of the scheme, has become a leading advocate for his fellow investors who have been Madoffed. He recently told the press that the average Madoff investor "is not a super-wealthy person. These are people who worked their whole lives, had maybe $200,000 — $400,000 invested. Their sole source of income was Madoff, and many are elderly. That’s why they’re so desperate."
Within that plea lies the problem: “Their sole source of income was Madoff.” Again, I sympathize with Schapiro and his cohorts. But there’s something fundamentally wrong with entrusting your entire nest egg (in technical terms, your portfolio) to one investment advisor. The number-one rule of investing is diversification: spread your capital around to avoid taking on too much risk in one area.
Certainly some of the victims were scammed because they invested their money with intermediaries (feeder funds) who then funneled the assets to Madoff’s firm, but that doesn’t let them off the hook. It’s your responsibility to know where your money is going. If you invest directly with ExxonMobil, for example, by owning shares of stock, are you aware that the company was funding climate-change deniers in 2008 after pledging to cease such practices? Whether you “believe” in climate change or not, do you want ExxonMobil spending money like this? Sure, it’s a heck of a lot easier to track money flowing in and out of a public company than it is to monitor your investments moving from one asset manager to another. But no one ever said investing was easy—only that it is very important.
It’s interesting to note that since Madoff we’ve seen very little emphasis on investor education. Financial institutions are begging the investing public to trust them again, and the government is trying to help them by creating new consumer watchdog agencies. But if there’s one lesson to be learned from Madoff, it’s this: Don’t blindly trust anyone else with your money. Check, double-check and triple-check their activities.
So today Madoff rots in jail. But instead of calling him “evil” and banishing him, here’s an idea: put a ball and chain around his ankle and give him a Winnebago. For the rest of his life, Bernie should be forced to drive around America, holding seminars on Investing 101. Now that would be progress.
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